A Bleak Assessment of the Economy

Karl Denninger may not be an Austrian, but he’s sounding more and more like Vox Day and Ron Paul.

For the sake of the country, I sure hope he’s wrong. I also hope Vox Day is wrong. I’m sure Denninger and Vox also hope that they are wrong.

Unfortunately, at best we have merely pushed the reckoning to the future, and at compound interest. Whether that reckoning happens in the near future or distant future is the only issue. The more we defer it, the greater the impact.

How do I know? Let’s put it in terms that everyone can understand. . .

Let’s say you have the following profile:

Take-home income: $5,000 per month
Credit card debt: $10,000, at 25% interest.
Mortgage: $200,000 at 6% interest.
Car payment: $400 per month, with $15,000 owed on a vehicle worth $20,000.
Insurance and taxes: $500.

Let’s say that your payments total to $2,100 per month, and that your other expenses–groceries, fuel, etc.–run you an addition $1,000. That gives you $1,900 at the end of the month.

So far so good.

Except you keep spending like a drunken sailor in drag, which means you are spending #300 per month on credit cards. This causes you to increase your credit card debt–BY OVER $1,000–by the end of month 6.

Now, the credit card companies start getting nervous. They jack up your rate to 30%. You keep making your payments, but don’t stop your spending.

Guess what? By the end of the year, your overall credit card debt is up by $3000, your monthly payments are now up by $100, and your credit is in trouble.

Now, let’s say that the credit card companies get even more nervous. This time, they cut your available credit line in half, which triggers an alert to Equifax, Trans Union, and Experian. The credit card companies, in turn, jack up your interest rate to 35%.

Your monthly credit card payment just spiked by $50, and –even if you spent nothing in month 13–your credit card debt has only gone down by $50, and that is in spite of paying over $400 to the credit card companies.

Right now, if you drastically cut your spending and apply the surplus to your credit cards, you can still win here.

But wait…let’s say you want to keep your lifestyle. You have lots of equity on your house, and feel like you can get a better situation if you took a Home Equity Line of Credit (HELOC). Let’s assume you do this, and wipe out your credit card debt. Let’s assume your HELOC is $25,000, which gives you an extra $12,000 to spend.

The credit card companies are suddenly happy, you are euphoric, and are now ready to spend like Elton John on a manic streak. You keep spending, your interest rates are low–let’s assume 12% for the HELOC.

At the end of the next year, your available HELOC credit is down to under $9,000.

Let’s also assume, because you are spending like Elton John on a manic streak, you also run up your cleaned-up credit cards. Let’s assume you run up $500 in additional spending at 35% interest, making minimum payments.

In 12 short months, you now have over $5,300 in credit card debt, in addition to over $16,000 in HELOC debt. Your consumer debt now exceeds $21,000 WHERE JUST TWO YEARS AGO IT WAS ONLY $10,000!!!

You might think, “So what? I’m bringing in plenty of income to service that debt and then some!”

Well, let’s say that the following things come down hard:

(1) the housing market collapses, and home values plummet 20% in your area.

(2) The mortgage company sees this, and puts a halt on your HELOC.

(3) The credit card companies become concerned that you are running up debt, so they cut your credit line and even shut down your account. They also jack up your interest rate to 40%.

(4) Because of the larger credit contraction, you lose your job. You are now bringing in $0 per month. You have 3 months worth of savings.

You respond by panicking.

You attempt to sell your house. Trouble is, you are now upside down on it. You owe $180,000, but your house can’t get $150,000. You will need to either (a) find a way to make the difference, (b) find a way to stay in the house, (c) do a short sale, or (d) punt and take a foreclosure.

Three months pass by…

You are still jobless, your credit cards are now past due. Your credit score is now shot to hell. If you cannot get a quick resolution, you are facing Chapter 7.

This is government, except for one thing: they have been printing their own money to service the debt–and expand the economy–while hoping things will get better.

Unfortunately, as Denninger and Vox have pointed out, this is not happening. The deleveraging is happening, and all the “stimulus” and “bailout” and “homebuyer credits” and “cash for clunkers” and “stimulus” programs, have failed to restart the economy.

Meanwhile, foreign creditors are now getting squeamish about buying our debt–just like the credit card and mortgage companies cutting off the HELOC and credit card accounts. The Fed has been playing a shell game, printing money that might as well be pulled from a Monopoly game board.

But the economy has not restarted. This is because the debt is not producing output sufficient that investors can have confidence in the debt that is in the system.

No amount of federal guarantees, stimuli, or bailouts, can change that reality.

Now, you can put your home and dreams on the shoulders of our Great Messiah The Holy Obama of Nairobi, who sitteth in the Oval Office, if you wish. And if you do this, he might even reward you with a federal job.

That will do you no good when the money fails, however.

The only remaining issue is when the reckoning will happen. The Austrian Schoolers have been harping on this problem for decades, and we now appear to be out of room to expand.

I say this as our government apparatus has become to bloated for taxpayers to service.

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